Saturday, January 17, 2015

The Latest IRS Changes / Be aware of some important additions to your 1099 forms as they begin to arrive from your brokers.

Theresa W. Cary for Barron's writes: Starting this week, your mail box will begin reminding you that tax season is underway with the arrival of your first 1099s. The third phase of the IRS’ cost-basis reporting regulations kicked in during 2014 so your forms will contain added information if you traded options or fixed-rate Treasury, corporate, or municipal bonds. There are some online sources that can help.
Those of us who actively trade options will be most affected by the changes. Cost-basis reporting was required for all opening stock transactions that took place after Jan. 1, 2011, and for mutual funds and exchange-traded funds purchased after Jan. 1, 2012. The rules for tracking options transactions were trickier to concoct and implement, though, and the final implementation was delayed until Jan. 1, 2014. There will be another phase of cost basis reporting that kicks in beginning Jan. 1, 2016 for more complex fixed-income instruments, including variable rate bonds, convertible bonds, and foreign-issued bonds.
All of these regulations came out of the Emergency Economic Stabilization Act of 2008, which required brokers to report the adjusted cost basis for various securities as well as whether gains were short-term or long-term. Taxpayers report their gains and losses on Schedule D of the 1040, based on the 1099-B forms supplied by their brokers.
Those forms, however, can paint an inaccurate picture of your gains and losses.
One factor that makes cost basis reporting tricky is that you may have generated wash sales, which occur when a trader sells a stock at a loss and then buys it back within 30 days. Even if you make those transactions at two different brokers, you can’t write off the loss to claim a tax benefit unless 30 days separate the transactions. Otherwise, it’s considered a wash sale and doesn’t qualify. Let’s say you sell a stock at a loss in your Schwab account, then buy it again two weeks later in your E*Trade account. The computers keeping track of your Schwab trading activity have no way of knowing what happened in your E*Trade account, and cannot flag the resulting wash sale. (snip, the article continues @ Barron's, click here to continue reading...)

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